The price elasticity of demand is -1.25, and the share of the tax borne by consumers is 0.80. What is the price elasticity of supply?
A) 6
B) 5
C) 1.56
D) 1

Question

Quizplus · Accepted Answer

The share of the tax borne by consumers is determined by the relative elasticities of supply and demand. The formula is: Share of tax borne by consumers = Elasticity of supply / (Elasticity of supply + |Elasticity of demand|). Given that the share borne by consumers is 0.80 and the elasticity of demand is -1.25, we can solve for the elasticity of supply: 0.80 = Elasticity of supply / (Elasticity of supply + 1.25). Solving this equation gives an elasticity of supply of 5.

The Price Elasticity of Demand Is -1